Author Archives: CFA Cyprus

Foreign Account Tax Compliance Act (“FATCA”)

Brief overview of the Foreign Account Tax Compliance Act (“FATCA”)

FATCA was enacted by the US government as a result of the government’s efforts to combat tax evasion by U.S. persons holding investments in offshore accounts. Essentially, FATCA provides for an obligation of certain U.S. taxpayers holding financial assets outside the United States to report those assets to the Internal Revenue Service (“IRS”).

In addition, FATCA requires foreign financial institutions to report directly to the IRS certain information about financial accounts ultimately held by U.S. taxpayers. Non-compliance with FATCA provisions will result in the withholding of a 30% tax on any US-sourced income payment to non-compliant account holders or non-participating foreign financial institutions (“FFIs”) effective from 2017 onwards.

In the course of the implementation of FATCA, the US government has concluded Intergovernmental Agreements with a number of governments worldwide aiming to streamline compliance with new legislation. There are two types of IGAs, Model 1, under which FFIs in partner jurisdictions will be able to report information on U.S. account holders directly to their national tax authorities, who in turn will report to the IRS, and Model 2, under which FFIs will report information directly to the IRS rather than their local jurisdictions. Cyprus has concluded a Model 1 IGA with the US on 2nd December 2014 (hereinafter “IGA”).

Key FATCA provisions and clarifications

The following considerations arise for professionals in the context of complying with FATCA:

1. Determine whether there is an obligation to register with the IRS and report accordingly;
2. Identify “US accounts” of US persons;
3. Report on these accounts.

1. Obligation to register

Entities which are classified as Foreign Financial Institutions (“FFIs”), as defined in the IGA, have an obligation to register with the IRS. The definition of FFIs covers the following types of entities:

a) Depository institutions (entities that accept deposits in the ordinary course of business);
b) Custodial Institutions (entities of which 20% or more of their gross income is attributable to holding of financial assets);
c) Investment Entities (entities that conduct business in trading in (i) money market instruments and other foreign exchange, interest rate and index instruments, transferable securities or commodity futures, or (ii) in individual and collective portfolio management, or (iii) otherwise investing, administering or managing funds or money on behalf of other persons.
d) Specified insurance company (insurance companies which issue or are obligated to make payments on a cash value insurance or annuity contracts.

Important Note: As the IGA between Cyprus and the US tax authorities includes the managed by rule it is important to examine whether any particular entity- irrespective of its activities- is managed by a third party professional manager and in this case whether this will classify the entity as an FFI.

Each of the above terms is defined in the IGA and further guidelines are expected to be published by the Cyprus Tax Department.

2. Reporting Obligations

2.1 U.S. Persons

Once an entity has registered with the IRS, it should proceed to identify the accounts of U.S. persons. U.S. person is defined in the IGA as follows:

“The term “US person” means a US citizen or resident individual, a partnership or corporation organized in the United States, or under the laws of the United States or any State thereof, a trust if (i) a court within the United States would have authority under applicable law to render orders or judgements concerning substantially all issues regarding administration of the trust and (ii) one or more persons have the authority to control all substantial decisions of the trust or an estate of a decedent that is a citizen or resident of the United States.”

The below U.S. indicia are provided by the IGA which assist in determining whether a client is a U.S. person:

“a) Identification of the Account Holder as a U.S. citizen or resident;
b) Unambiguous indication of a U.S. place of birth;
c) Current U.S. mailing or residence address (including a U.S. post office box);
d) Current U.S. telephone number;
e) Standing instructions to transfer funds to an account maintained in the United States;
f) Currently effective power of attorney or signatory authority granted to a person with a U.S. address; or
g) An “in-care-of” or “hold mail” address that is the sole address the Reporting Cyprus Financial Institution has on file for the Account Holder. In the case of a Pre-existing Individual Account that is a Lower Value Account, an “in-care-of” address outside the United States or “hold mail” address shall not be treated as U.S. indicia.”

2.2 Reportable Accounts

Once an FFI has identified its US clients, an obligation to obtain and exchange information on ‘reportable accounts’ of such persons arises. ‘Reportable accounts’ as well as the information to be exchanged are also defined in the IGA.

Since Cyprus has concluded a Model 1 IGA, reporting by Cyprus FFIs will be made to the Cyprus tax authorities. Guidelines as to the reporting procedure are expected to be issued by the Cyprus Tax Department.

2.3 Classification of non-US clients

FFIs are obliged to classify their non-US clients as well, by completing Form W-8BEN-E based on the income received by the respective client. The available categories are defined in the IGA and various guidelines have been issued by financial institutions assisting with the completion of the form.

Important Note: Although each Financial Institution may provide Guidelines for the classification of their client entities, those guidelines are only for informational purposes and cannot be used for the classification of the company. The responsibility for the classification lies only with the management of each entity and the financial institutions are prohibited by the Law to express any opinion.

Current Concerns

There are still many grey areas with respect to FATCA which need to be clarified. One of the main challenges for companies providing administrative services in Cyprus is whether they should register as FFIs or whether they should proceed to register the entities under their administration separately. Each service provider should examine the obligation to register under their own merits and in the context of the guidance available at the moment.

Tax & VAT Committee

AML & Compliance Affairs Committee

Working Groups with ICPAC

The Cyprus Fiduciary Association, in its effort to raise the standards of the fiduciary sector and the provided services, has been in contact with the Institute of Certified Public Accountants of Cyprus (ICPAC) in an effort to unify the largest possible number of ASPs under a single regulatory body and under a single representative voice. To that end, CFA has come to an agreement with ICPAC to form certain working groups that would assist in the development of mutual trust between the two bodies and be the beginning for common understanding and common vision.

The first two working groups created were the following:

1. Review of the regulatory regimes under the 3 supervisory bodies
To identify the differences among the 3 regimes in order to find the ways to eliminate them and create a level-playing field.

2. Preparation of a strategic plan for the fiduciary sector
To create a common vision for the fiduciary sector in Cyprus and draft a detailed strategic plan to be implemented along with the government. Our intention is to involve as many stakeholders as possible during this process.

The kick-off meetings of the two aforementioned groups were held on Friday, March 13th, and Wednesday, March 18th, respectively. Both meetings revealed the common understanding and common targets that providers of the same services share among themselves, irrespectively of their supervisory body. In both cases, we have defined the working mode of our groups and set a specific action plan for the near future.

Fiduciary Sector Strategic Plan – Meeting with the Under Secretary to the President of the Republic

On Thursday, March 19th, the Cyprus Fiduciary Association held a meeting with the Under Secretary to the President of the Republic, Mr Constantinos Petrides. The purpose of the meeting was to deliver to Mr Petrides the Strategic Plan for the Fiduciary Sector, as this was drafted during the CFA Forum in November 2014 and was formed into a strategic plan with a list of 30 action points under the fields of public sector, compliance, products & services, regulation, and promotional activities.

During the meeting, the Association’s representatives had the opportunity to brief Mr Petrides on the latest developments in the fiduciary and international business sector, point out certain issues that require immediate action, analyse the vision for the sector and the Cyprus economy, and provide further information on the Association’s current efforts on creating a broader coalition for facing current and upcoming challenges.

Mr Petrides was very interested in what we had to say and got the opportunity to go through many of the points on the list to give us a brief update on their current status. He stated that such initiatives are very helpful and repeated the government’s intention to put every effort in further developing the services sector in Cyprus. He realises the need for single regulation and common voice for the industry, something that will also help the government to promote policy issues more easily and more effectively. The Under Secretary requested CFA to keep them informed on our next actions and promised to have the government’s support in promoting those reforms that will advance our sector and the Cyprus economy.